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Comparison & Review of Top High-Yielding Debt Options for Investors

Understanding High-Yield Debt Investment Options

Fixed Deposits & low-risk Debt Mutual Funds, offer safety to investors but only provide a relatively low yield/interest-rate. Traditionally, equity is the recommended route for investors seeking higher returns, but not all investors are comfortable with the shorter-term volatility that is inherent to the equity asset class. 

In recent years, with the growth of the AIF industry in India & the development of the secondary market for corporate bonds, a number of interesting new investment options have emerged that offer investors higher-returns than traditional debt options but without the shorter-term volatility inherent to equities. 

In this blog post, we evaluate the relative merits of these various high-yield debt options, and their appropriateness for different types of investors. 

High-Yield Debt AIF's

Pure High Yield Debt AIF's

The first category of high-yield investment options, are relatively easy to understand. These are essentially funds that invest in traditional debt securities, but typically lend to borrowers who are unable to borrow from banking channels at low-interest rates (thus leading to the higher interest-rates that these funds enjoy). These funds offer investors a higher yield, but this is accompanied by a higher inherent risk of default (credit risk) of the underlying papers.
Scheme Gross YTM Net Pre-tax YTM Target Borrower Credit Rating Target Borrowers Quick Description
Vivitri Alpha Debt AIF 12.25% 10.00% A A rated Corporates Focused on the performing credit category, the Alpha Debt Fund focuses on A rated corporates (making this amonngst the lowest risk-categories amongst debt AIF’s that typically focus on higher risk-reward borrowers). Risk is further reduced via a 10% first-loss protection, offered via a variable share-class structure. While yields are not the highest, this is a good option for investors not willing to take on too much risk.
Vivitri Alpha Debt Enhanced AIF 15.25% 12.50% A BBB rated Corporates Focused on the performing credit category, the Alpha Debt Fund focuses on BBB rated corporates (an attractive segment in terms of risk-reward). Risk is further reduced via a 7.5% first-loss protection, offered via a variable share-class structure.
Vivitri Emerging Corporate Bond AIF 15.25% 13.00% A BBB- rated Corporates Focused on the performing credit category, the Alpha Debt Fund focuses on BBB- rated corporates (an attractive segment in terms of risk-reward). Unlike other Vivriti funds, the emerging corporate bond AIF does not have a first-loss protection structure.
Vivitri Promising Lenders AIF 15.25% 12.00% A BBB- rated Corporates | Financial Sector Focused Focused on the performing credit category, the Alpha Debt Fund focuses on BBB- rated corporates, in the financial services sector. Risk is further reduced via a 5% first-loss protection, offered via a variable share-class structure.
ICICI Pru Corporate Credit Opportunities AIF 14-16% 12.5-14.5% Project Finance | LAS | Structured Credit Banks & NBFC’s have faced credit-issues in the Project Finance / LAS / Structured Credit segments of lending, leading to a large funding gap in this space (leading to attractive yields). While there is clearly attractive yields available in this space, it is important to understand that these are riskier lending structures, and accordingly accompanied with a higher chance of potential credit events.
Axis Rera Opportunities 2 AIF 21-25% 15-18% Unrated Real-Estate Lending Banks & NBFC’s have faced credit-issues lending to real-estate in the past, leading to a large funding gap in this space (leading to attractive yields). While there is clearly attractive yields available in this space, it is important to understand real-estate is typically seen as a riskier-segment to lend to, and accordingly accompanied with a higher chance of potential credit events.
ICICI iREIF2 18-20% 14-15% Unrated Real-Estate Lending Banks & NBFC’s have faced credit-issues lending to real-estate in the past, leading to a large funding gap in this space (leading to attractive yields). ICICI iREIF2 focuses on lending to affordable housing projects in major cities, with a strong focus on MMR (~50% of the planned portfolio). Investments take place across the development life-cycle. While there is clearly attractive yields available in this space, it is important to understand real-estate is typically seen as a riskier-segment to lend to, and accordingly accompanied with a higher chance of potential credit events.
Unifi High Yield 12-14% A to BBB A to BBB-rated corporates Unifi High-Yield invests in a diversified mix of high-yield debt (~70% of portfolio. A to BBB rated corporates), Blue-chip Debt (~20% of portfolio) and corporate event arbitrage/select equity deals (~10% of the portfolio). Unifi High Yield has the longest track record amongst any of the high yield funds in this list.

Asset-Backed Yield Funds

The second category of high-yield options, typically invest in physical assets that offer an annual rental yield, and where returns are boosted by an expected gain from capital appreciation of the underlying asset at the time of the sale of this asset by the fund (helping boost returns, in a tax-efficient manner). These funds offers investors a higher yield, but a part of this expected higher yield is dependent on the capital appreciation of the underlying asset actually playing out.
Scheme Target Returns Target Assets Quick Description
Varanium Venture Debt Fund 19-21% Venture Debt + Revenue-backed Financing Varanium Venture Debt aims to underwrite debt to Indian start-ups — broken approx 50:50 into revenue-based financing for early-stage start-ups and venture debt. The strategy aims to diversify across industries, however, D2C, SaaS and Fintech are key focus areas. The fund focusses on companies with positive unit economics and is allowed to reinvest capital during its 5 year fund tenure.
Edelweiss Crossover Yield AIF 20-22% Venture Debt + equity warrants 85-90% of the fund will be invested in venture debt securities (the risk of which are substantially reduced by the planned structure – only lending to firms as an add-on to their equity raise, short-term funding with a 12-18 month repayment window where funding has already been provided for by the equity raise). Given the low-risk structure, yields on the venture debt component are a relatively modest 8-9%. The returns of the fund are boosted by the equity warrants, where the success of even a small proportion of the companies invested into, can lead to returns of the fund reaching the targetted 20-22% potential indicated on their presentations.
Edelweiss Infra Yield AIF 20% Operating Infrastructure Assets Invest in fully-operational infrastructure assets (no risks of project execution, delays etc). A large pipeline of infra-assets that the government & private infra companies wish to monetise, relatively low-risk on the inherent cash flows of the project (~8% annual yield), and a planned InVit structure to help in capital appreciation on exits (~10-12% capital appreciation potential) and the use of leverage at the fund to boost yields makes this a relatively attractive option for investors seeking high-yield investment options.

Absolute Return Long-Short AIF's

AIFs that follow a long-short strategy, invest in a combination of long positions (via either equity shares or equity derivatives) and short positions (taking a short or selling position in a stock, via equity derivatives). The broad aim is to go long stocks that are expected to move up, and short stocks that are expected to move down. Absolute Return Long-short funds typically have a lower net-exposure (gross long minus gross short) to equities, and accordingly are in a position to deliver returns regardless of market conditions and with substantially lower volatility than pure equity funds.
Scheme Target Net Long Closest Hybrid MF Category
Avendus Market Neutral ~ 0% Conservative Hybrid
Avendus Absolute Return AIF 15% to 20% Conservative Hybrid
Tata Absolute Return -20% to 35% Dynamic Asset Allocation
Alta Cura Absolute Return 0-10% Equity Savings

Direct Investments in Bonds

Investor’s also have an option to invest directly in bonds (which IME Capital can facilitate), either via investing in primary issuances of bonds or by investing in them in the secondary markets. 

Yields on these bonds are dependent on the maturity & the perceived credit-risk of the borrower. 

Hybrid Mutual Funds

While not technically debt mutual funds, certain lower-risk hybrid funds – such as Conservative Hybrid Funds (~20% equity exposure) & Equity Savings Fund (~33% equity exposure) may also be considered by investors seeking investments with returns higher than normal debt but without taking on too much incremental risk.